Most qualified retirement plans, including ESOPs, 401(k)s, and 403(b)s provide for a designated beneficiary to receive benefits under the plan when the participant dies. When an employee designates a beneficiary, he or she may be filling out the documents along with dozens of other pages of documents related to a new job. However, confusion over who to name as a beneficiary and how to change beneficiary designation can lead to disputes later on.
As a default, most married individuals will put their spouse as their designated beneficiary, and unmarried individuals may name their parents or a sibling. However, plan participants rarely go through the process of updating or changing their beneficiaries, even after significant life changes. Once an employee leaves a job, they may still have benefits under a plan but are unsure of how to go about changing their beneficiary designations.
There have been a number of disputes involving who is entitled to ERISA plan benefits after the death of the participant. According to the Department of Labor, these disputes include questions “about whether the beneficiary designation accurately reflects the participant's intent.” Issues range from failing to change a designation of a spouse after divorce, incomplete designation forms, and designations inconsistent with the terms of a benefit plan.
Disputes can result in costly litigation for plan administrators. In a recent case in Florida, a former employee with a supermarket chain wanted to change the designated beneficiaries in her qualified retirement plan. Iraleth Rizo worked for the Publix company, participating in both the company's ESOP and 401(k). When initially filling out the designated beneficiaries, Rizo named her niece and nephew.
Ms. Rizo eventually left the company. When she was later diagnosed with cancer, she called and asked about making changes to her beneficiary designation. The representative told Ms. Rizo that she would send a letter naming her new beneficiaries and their Social Security numbers. Ms. Rizo sent the required information, naming a friend, Arlene Ruiz, as the new beneficiary. Unfortunately, Ms. Rizo died before the company received the update.
The niece and nephew received the benefits and Ms. Ruiz sued the plan administrator. The court found in favor of the plan administrator because although Ms. Rizo intended to change her beneficiaries, she “did not strictly comply with the Summary Plan Descriptions' directives for how to change her beneficiaries.”
Plan administrators can benefit from providing clear directives and instructions on naming beneficiaries and ensuring a designated beneficiary is properly named for plan participants. Language in plan documents, employee communications, and Summary Plan Descriptions should be clear and consistent.
Plan administrators may also want to regularly (i.e. annually) remind participants on how to update their beneficiaries in light of life-changing events and provide them with the necessary beneficiary designation forms to do so. This includes clear instructions on how to change plan designated beneficiaries or include additional beneficiaries. Clear and consistent information can help avoid costly litigation down the line.
Butterfield Schechter LLP is San Diego County's largest firm with a focus on employee benefit legal services. If you are are providing benefits to your employees, make sure your benefit plans conform with regulatory requirements and represent the best interests of your company and employees. Contact our office today with any questions on how we can help you and your business succeed.